My retirement account goal analyzer advises that I keep 3% in cash. My retirement date is over 30 years from now, so I can tolerate heavy volatility and certainly don't need liquidity.

Does it make much sense to buy long-term "cash-equivalent" ETFs such as TLT (iShares Barclays 20+ Year Treasury Bond ETF) for the "3% cash" recommended allocation?

The only information I've been able to find on this to get some insight is "Individual Bonds vs. Bond ETFs: Two Completely Different Animals" — suggesting that perhaps only part of a fixed-income strategy should be in bond ETFs.

Or maybe, for now, I should just ignore the advice altogether, and not bother with 3% cash? Maybe should I look into buying long-term bonds directly?


3 Answers 3


20-year Treasury Bonds are not equivalent to cash, not even close. Even though the bonds are backed by the full faith and credit of the U.S. Government, they are long-term debt and therefore their principal value will fluctuate considerably as market interest rates change.

When interest rates rise, the market value of 20-year bonds will drop, and drop more than shorter-term bonds would. Your principal is not protected in the short term. Principal is only guaranteed returned at the 20-year maturity of those bonds. But, oops, there is no maturity on the 20-year bond ETFs because every year the ETF rolls the 19-year positions into new 20-year positions! ;-)

For an "equivalent to cash" piece of a portfolio, I'd want my principal to be intact over the short term, and continually reinvested at the higher short-term rates as rates are rising. Reinvesting at short-term rates can be an inflation-hedge. But, money locked in for 20-years is a sitting duck for inflation.

Still, inflation aside, why do we want our "equivalent to cash" position to be relatively liquid and principal-protected?

When it comes time to rebalance your portfolio after disastrous equity and/or bond returns, you've got in your cash component some excess weighting since it was unaffected by the disastrous performance.

That excess cash is ready to be deployed to purchase equities and/or bonds at the lower current prices. Rebalancing from cash can add a bonus to your returns and smooth volatility. If you have no cash component and only equities and bonds, you have no money to deploy when both equities and bonds are depressed. You didn't keep any powder dry. And, BTW, I would personally keep a bit more than 3% of my powder dry.

Consider a short-term cash deposit or good money-market fund for your "equivalent to cash" position.

  • 1
    +1 good explanation. 3% is a little short for me too, I like to have some cash so I can buy when everyone else is panic selling...
    – bstpierre
    Aug 14, 2010 at 22:55
  • nice insight on bond etfs. if you've more capital >50000 to invest in cash, I would recommend bond laddering which invests in bonds/cds/bills with different maturities. It helps taking advantage of higher long term rates while keeping cash liquid and diversifying against interest rate risk.
    – user1185
    Aug 14, 2010 at 23:52
  • 1
    @saminny: Yes, laddering is a good strategy for the bonds part of a portfolio; but only the nearest term rungs (e.g. less than 1yr maturity) would I consider close-to-cash. Aug 15, 2010 at 0:11

With 30 years until retirement I would not be very concerned about the 3% cash rule. If you do want to follow that advice I would just keep that money in a cash equivalent like a money market fund or short term cd.


There are a few ETFs that fall into the money market category: SHV, BIL, PVI and MINT.

What normally looks like an insignificant expense ratio looks pretty big when compared to the small yields offered by these funds. The same holds for the spread and transaction fees. For that reason, I'm not sure if the fund route is worth it.

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